Friday April 15

Stocks fall slightly however still finish the week with gains. The S&P500 fell 0.1% to 2,080 and the Dow Jones lost 0.2% to 17,897. The S&P500 still rose 1.6% on the week and the Dow gained 1.8% over the same period. Economic data today in the US was not reassuring, as industrial production fell 0.6% in March which was lower than expected. Also contributing to negative sentiment was a renewed slide in oil prices. WTI lost 2.7% to $40.40 and Brent fell 1.7% to $43.10. Both oil benchmarks still finished higher over the course of the week. Economic data out of China was more upbeat, showing that industrial production, retail sales, and fix asset investment all beat estimates. GDP in China showed 6.7% growth from the first quarter of last year which met estimates. This suggests that stimulus in China is working to prevent a hard landing (for now) which was a major concern to start the year. Banks continue to beat estimates in their first quarter earnings, which drove upward movements this week. Treasury yields fell on the day. The ten year fell four basis points to 1.75% and the two year yield fell four basis points to 0.73%. Yields were higher on the week. Over the course of the week credit spreads tightened for both investment grade and high yield indices. The dollar fell today losing 0.1% against the euro to $1.1284 and 0.4% against the pound to $1.4209.

After sharp underperformance at the start of the year, financial shares showed signs of strength this week as earnings beat expectations. Even though earnings fell for JP Morgan, Bank of America, Citi, and Wells Fargo the results were still better than expected. Revenues also fell for all of these banks except WF revenues rose. Earnings were dented by decreased activity in investment banking activities including both IBD and trading. All banks are seeking to protect themselves in the event of more stress in the energy sector by setting aside additional capital against energy loan portfolios. Share prices for these companies rose over the course of the week led by Citi with an 11% gain. Investment grade financial credit spreads rose at the start of the week however fell dramatically after JP Morgan kicked off the earnings season for banks. Morgan Stanley and Goldman Sachs will report earnings next week. The main source of concern remains exposure to the energy sector as well as reduced investment banking and trading activities. However guidance on these areas was somewhat optimistic. Oil prices appear to be stabilizing and executives have noted that loan risk in these areas is manageable. As far as IB activity goes, analysts expect that there is a heavy backlog of deals and other activities after the quiet first quarter.

Goodrich Petroleum files bankruptcy as the trend of rising defaults continues. Over the last year share prices have fallen from above $4 per share and now are virtually worthless. Accordingly bond yields have spiked. The company is in the process of striking a deal with creditors who own $400mm of its debt. The deal would involve $175mm in debt forgiveness and the companies would exchange their existing debt for equity ownership. The deal would dramatically reduce the value of the companies outstanding debt. Since 2014 around 60 oil companies in the US have filed for bankruptcy. Together these companies represent around a total of $20bn in debt. Debt for equity swaps have been common in these types of situations. Goodrich has been trying to increase liquidity through a variety of efforts over the last year. One year ago the company issued $100mm in bonds, $47.5mm in common stock, and sold around $110mm worth of assets. The debt for equity swap will also provide the company with liquidity since it will no longer have to make debt repayments. At the same time banks will be forced to weather the storm of low oil prices putting stress on oil company margins. The company has also been exchanging bonds for new bonds with longer maturities and lower on the creditor line of preference in efforts to restructure.

The IMF is going to suspend its lending to Mozambique after finding out about undisclosed loans which violates the borrowing agreement between the two parties. In December the IMF agreed to a $283mm rescue loan to Mozambique, however close to $1bn in undisclosed loans suspends disbursements from that rescue fund. The loans were made by Credit Suisse and other lenders. After the IMF announced the suspension, bonds that are due in 2023 fell from 90.50 to 87.50 cents on the dollar. The country had $6bn in reported debt as of 2012 and the $1bn in undisclosed debt is a significant amount that investors were not aware about.

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Friday April 15

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